Analyst weighs on Penney's move to boost liquidity

Key retail analyst see Penney's move to boost liquidity as a positive

Associated Press

NEW YORK (AP) -- A key Citi Investment Research analyst sees J.C. Penney Co.'s decision to raise its credit facility and boost liquidity as a positive as the struggling department store chain looks for more flexibility in financing its multi-year transformation.

In a report issued Tuesday after Penney's announcement, Deborah L. Weinswig of Citi Investment Research said she found the move encouraging for several reasons.

It gives Penney has greater access to liquidity, if needed, to fund the transformation and roll out shops within its stores in 2013. She noted the company hasn't tapped its credit facility to date, calming concerns among investors that it had. And she said the company's ability to increase its credit facility shows that banks continue to be willing to lend to the company.

The department store chain said Tuesday it expanded the credit facility to $1.85 billion and got an option to increase that by another $400 million. The total borrowing capacity is now up to $2.25 billion.

On Jan. 31, the company exercised the $250 million "accordion" option under its prior credit agreement to increase the size of its prior facility to $1.75 billion.

The Plano, Texas, retailer said that the increase enhances its liquidity and provides it with additional financial flexibility to support its transformation.

The move comes as Penney marks the one-year anniversary of a radical plan to get rid of most sales in favor of every day prices. The strategy is part of an overall plan spearheaded by CEO Ron Johnson to transform every part of the business from the brands it carries to the store experience.

But the overhaul has been more challenging than expected. Penney is expected to report on Feb. 27 its fourth consecutive quarter of big sales drops and net losses since it implemented its new pricing strategy. The worry is that Penney won't be able to stem the decline in sales in time to finance the transformation of the stores. Late last year, it started rolling out shops within its stores. It plans to carve up its stores into 100 specialty shops by late 2015.

Weinswig noted in her report that she expects the company to spend about $1 billion in capital expenditures to primarily fund the continued rollout of the shops as well as investment in technology.

"As we enter the second year of our transformation, today's announcement reflects the confidence of our banking group in our long-term strategy and further strengthens our liquidity position as we continue to execute our plan," said Ken Hannah, Penney's chief financial officer, in a statement. The company said no funds have been drawn under the agreement.

J.P. Morgan Securities LLC, Bank of America Merrill Lynch, Barclays Capital and Wells Fargo Capital Finance arranged the financing transaction. .

Shares rose 31 cents, or 1,6 percent, to $19.58 in premarket trading Wednesday. Investors have sent shares of Penney down more than 55 percent from a peak of $43 in the days after the plan was rolled out in February 2012.

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